FINANCIAL REPORTING AND ANALYSIS

Financial Reporting & Analysis

Overview, Techniques, Ratios and Limitations

Carlos B. Steinblock · [email protected]

● The Balance Sheet ○ Liabilities

→ Current → Accrued Liabilities / Deferred Tax Liabilities → Long Term Debt

○ Equity

Recap

Agenda

● The Income Statement ○ Net Sales · CoGS · Gross Profit ○ Operating Expense · Operating Profit ○ Other Income (Expense) · Equity Earnings ○ EBIT & Effective Tax Rate ○ Special Items · Net Earnings · EPS ·

Comprehensive Income

Common Size Income Statement · an Illustration

Net Sales

Understanding and assessing the Quality of the Revenue figure.

1. What about Sales Returns & Sales Allowances? Not to be confused with EPD! (hits the financial expense line)

2. What triggers difference from period to period? Quantities or Price difference or even worse… Product Mix!

Costs of Goods Sold · (also called Cost of Sales)

● affected by the cost flow assumption used to value inventory, the applied accounting method will make a difference: → FIFO → LIFO → average cost

Gross Profit

● The Difference between the Net Sales and CoGS or Cost of Sales is the Gross Profit. ...whilst...

● The Relationship between the two mentioned before result in the Gross Profit Margin.

Discuss how that makes a substantial Difference!

Gross Profit · an Illustration ·

Operating Expense

● usually called SG&A (Selling, General & Administrative) these would represent: ○ They include salaries, rent, insurance, utilities,

supplies, and sometimes depreciation and advertising expense.

Operating Expense

● Impairment charges are the expenses recognized to record a decline in value of a long-term asset. Impairment charges may occur in connection with goodwill or other intangible assets (SW) but can also be recognized when asset values of property, plant, and equipment decrease below book value.

Operating Profit · (also called EBIT)

● The Difference between the Net Sales and Expenses associated with the usual activity is the Operating Profit. ...whilst...

● The Relationship between the two mentioned before result in the Operating Profit Margin.

Other Income (Expense)

This category includes revenues and costs other than from operations, such as dividend and interest income, interest expense, gains (losses) from investments, equity earnings (losses), and gains (losses) from the sale of fixed assets. The relative amounts will be dependent on the level of investments and the amount of debt outstanding, as well as the prevailing level of interest rates.

Equity Earnings Questions regarding use of cost or equity come into play for stock investments of less than 50%, where consolidated financial statements are not prepared. Accounting rules permit two different methods to account for stock investments of less than 50%. The equity method allows the investor proportionate recognition of the investee’s net income, irrespective of the payment or nonpayment of cash dividends; under the cost method, the investor recognizes investment income only to the extent of any cash dividends received. At issue in the choice of accounting methods is whether the investor exercises control over the investee. The equity method of accounting should be used when the investor can exercise significant influence over the investee’s operating and financing policies. No problem exists where there is ownership of 50% or more because, clearly, one company can control the other.

EBIT & effective Tax Rate

● Earnings before Interest & Tax

● Tax Avoidance is not Tax Evasion

● Effective Tax Rate = Income Taxes / EBIT

Special Items

● Discontinued Operations ● Extraordinary Items · Business relevant events ● One Timer

Not likely to happen in the future again

Net Earnings · EPS · Comprehensive Income

● Net Earnings is the final calculated figure in the Income Statement (after Interest & Tax but before Dividends).

● Net Profit Margin is the relationship between Net Earnings and Net Sales. ● EPS = Net Earnings available to common stockholders for the period

divided by the average number of common stock shares outstanding. ● Other Comprehensive Income: foreign currency translation effects,

unrealized gains and losses, additional pension liabilities, and cash flow hedges.

Other Comprehensive Income · an Illustration

The Statement of Stockholders’ Equity

It details the transactions that affect the balance sheet equity accounts during an accounting period. Changes to the common stock and additional paid-in capital accounts are due to employees exercising their stock options.

Exercise:

Exercise: Let’s pick randomly 3 mayor listed Corps

● Let’s take a look at their Income Statement and analyze ● Discuss and draw conclusions on how they performed

for the periods displayed. ● What have we learnt?

HP Inc. & subsidiaries

Exercise: Let’s pick randomly 3 mayor listed Corps Instructions

1) Compute the following for 2018 and 2017. (Round to one decimal place.) a) Working capital b) Current ratio c) Quick ratio

2) Comment on the trends in the liquidity measures and state whether the Corporation appears to be able to satisfy its liabilities at the end of 2018.

3) Compute the percentage changes for 2018 in the amounts of net sales and net income. (Round to one-tenth of 1 percent.)

4) Compute the following for 2018 and 2019. (Round to one-tenth of 1 percent. For items c and d, use the year-end amounts stated above as substitutes for average assets and average stockholders’ equity.)

a) Gross profit rate b) Net income as a percentage of sales c) Return on assets d) Return on stockholders’ equity

5) Comment on the trends in the profitability measures computed in parts 3.) and 4.)